How Verizon and AT&T Will Crush T-Mobile

(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of VZ.)

The wireless business has changed significantly in recent years, as technological improvements have given users the ability to use their phone more like a handheld computer. The new capabilities of the latest smart phones have also increased data usage, and as a result, commoditized data. This has pushed the price of data to near zero, with unlimited data plans offering by major carriers.

As a Barron's article recently noted, T-Mobile US Inc. (TMUS) has been one of the principal beneficiaries of this movement, winning business away from Verizon Communications Inc. (VZ) and AT&T Inc. (T). But this advantage is likely to wane as the industry continues to push toward the future, placing T-Mobile at a disadvantage.

The wireless industry is at an inflection point, with 4G being widely deployed. The next movement will be toward 5G. The shift over the next couple of years will lead to faster data transmission, giving users the ability to do even more on their phones than they do today.

T-Mobile Can't Compete

T-Mobile will probably be at a disadvantage when trying to compete with Verizon and AT&T in the future. That is because both companies have been aggressively pursuing big-ticket content additions.

T-Mobile already has low cash holdings, at only $180 million, and debt totals that equal three-fifths of its market cap, at roughly $31 billion. T-Mobile does not currently have the resources, leaving in a vulnerable position in which it will need to be acquired by a large company like Comcast Corp. (CMCSA). Or, it will have to issue huge sums of debt, going for low-hanging fruit content plays.

The Pivot To 5G

AT&T has already pivoted toward the future with its pending acquisition of Time Warner Inc. (TWX), bringing content to AT&T, and creating a vertically integrated media company. AT&T can now control a consumer's complete content experience, from content creation to distribution to consumption.

Verizon has attempted to do the same, albeit in a different way, with the purchases of AOL and Yahoo! However, Verizon will likely have to add video content at some point to remain competitive with AT&T. An article on Investopedia from September 14, we detailed why Verizon should buy Netflix.

5G Is Multiple Times Fast Than 4G

The speed of 5G technology is up to 50 times faster than 4G, with the ability to download double-digit megabytes per second. That is fast enough to download any content in seconds.

Someday, there may be no noticeable difference been your broadband connection at home and your phone. This means wireless phones and tablets are likely to see even more increased uses over time, and could replace the traditional fiber bundle coming into your home. (See: 5G vs. 4G: 4 Things Investors Should Know Before 2020.)

Verizon And AT&T Are Better Positioned

Verizon and AT&T both have significant amounts of debt as well, but they also have market caps that are three and four times larger than that of T-Mobile, respectively. With a market cap of nearly $190 billion, Verizon, and AT&T (market cap: $225 billion) could use their equity as currency in future acquisition plays to go after big content providers. T-Mobile's $60 billion market cap doesn't give it nearly the same amount of currency to offer.

4G data has become commoditized, and it is a game that T-Mobile can easily win. But investing isn't about today. It is about tomorrow, where Verizon and AT&T will be able to dominate looking ahead. The higher speed that 5G will offer consumers is likely to expand what users are currently using their wireless devices for, and that fuels even more content consumption.

Companies like AT&T will benefit the most in this shift, being a vertically integrated media company. Verizon can jump in at a moment's notice to take on AT&T. But T-Mobile is simply too small and won't be able to win until 5-G becomes commoditized, which could be nearly a decade away.

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.